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Cash distributions versus periodic redemption
Old 08-23-2014, 05:43 PM   #1
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Cash distributions versus periodic redemption

I currently have several mutual funds where my dividends and capital gains are being reinvested. I want to start taking some money out of these. It seems like the obvious way to do this is to start getting the distributions in cash for some of the funds. Then I got to thinking (maybe overthinking) about just redeeming a certain dollar amount of the shares periodically, while still reinvesting distributions. The advantage of doing this would be that I would know how much money I'd be getting and also can determine when. The downside would be paying capital gains on any gains depending on what my cost basis is. (of course, it could also generate a capital loss and I'd save on taxes). It makes sense to just start taking the distributions in cash. Are there any other considerations I haven't thought of? Besides what I mentioned, is there an advantage of periodically redeeming shares? For others that have been in my situation, do you have any recommendations?
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Old 08-23-2014, 05:48 PM   #2
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Is this a taxable account or a tax-adavntage account? Since you wrote about "paying capital gains", I will assume you really meant "capital gains taxes" and that this is a taxable account.

It will be better to start by not auto reinvesting distributions. This way there will less interference with tax-loss harvesting moves and less "lots" to worry about when doing the bookkeeping. Sure, the broker keeps track, but somehow thinking about it makes emotions enter. OTOH, you may also be emotional when it comes to deciding which lots to sell.

So take distros in cash.

I've been taking all taxable account distributions in cash for several years now. It works for me.
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Old 08-23-2014, 06:08 PM   #3
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Is this a taxable account or a tax-adavntage account? Since you wrote about "paying capital gains", I will assume you really meant "capital gains taxes" and that this is a taxable account.

It will be better to start by not auto reinvesting distributions. This way there will less interference with tax-loss harvesting moves and less "lots" to worry about when doing the bookkeeping. Sure, the broker keeps track, but somehow thinking about it makes emotions enter. OTOH, you may also be emotional when it comes to deciding which lots to sell.

So take distros in cash.

I've been taking all taxable account distributions in cash for several years now. It works for me.
Thanks for the advice. They are taxable accounts and I should have mentioned that.
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Old 08-23-2014, 06:16 PM   #4
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Here is what I have been doing for the last ~6 years after I ERed.

I have one large bond fund whose monthly dividend distributions I take in cash and use to pay my bills. I have several other, smaller bond funds whose monthly dividends I reinvest. I also have one stock fund whose quarterly dividends I take in cash to supplement the bond fund's dividends (whic have been declining slightly over the years).

Any excess cash from the big bond fund's monthly dividends and stock fund's quarterly dividends gets reinvested into the big bond fund so I can have more shares to partly offset the declining DPS it pays every month.

Another thing I do is to have any cap gain distributions from the big bond fund get reinvested, not taken as cash. This is because those distributions are erratic and I do not want to include them in my regular budget (i.e. they are "gravy").

I rarely have to sell any shares of any of my funds, so in recent years I have not had to file and Schedule D or Form 8949, making my income taxes rather easy to complete. Any dividends and cap gain distributions can go directly onto Form 1040.
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Old 08-23-2014, 08:35 PM   #5
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Most of my dividends are paid into a money market account from which I withdraw. My thinking is that it allows me to take the cash when I need it without having to think about "is the market up/down/good time/bad time" etc.

I reinvest cap gains regardless...no reason, "just because"
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Old 08-23-2014, 08:45 PM   #6
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Most of my dividends are paid into a money market account from which I withdraw. My thinking is that it allows me to take the cash when I need it without having to think about "is the market up/down/good time/bad time" etc.
Yep. Our dividends feed our MMkt account and I set up an automatic monthly transfer from that account to our checking account. It's almost like getting a paycheck - without the nasty Sunday night stress or inconvenient daily commute.
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